2014 (9) TMI 43 - AT - Income Tax

Tribunal adjusts comparables and deductions for transfer pricing, upholds exclusion of communication charges.

The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain companies from the list of comparables for transfer pricing purposes ... Transfer pricing adjustment - Selection of comparables – Huge difference in turnover – Functionally different unit - Held that:- The three companies are having huge turnover, as compared to the assessee's turnover of about ₹ 22 crores – following the decision in Capital IQ Information Systems India Ltd. V/s. DCIT [2014 (3) TMI 626 - ITAT HYDERABAD] - the companies having high turnover cannot be selected as comparable with companies having reasonably small turnover – it has been rightly held by the lower authorities that the activity of the company as a KPO service - it cannot be said that the company is comparable to the assessee as the comparable to a company providing purely ITE services, as it is engaged in providing purely KPO services. The activities undertaken by the said company vis-à-vis the activities of the assessee before it, which is engaged in providing only ITE Services to its AE, had remitted the issue to the file of the TPO for considering afresh with the following observations – thus, the matter is remitted back for fresh consideration regarding the selection of comparable - exceptional events like merger/demerger does impact the profitability of a company - it is necessary to look into this aspect before selecting a particular company as comparable - when the assessee itself has selected it as a comparable in its TP Study, it is to be assumed that the assessee has considered all the aspects including the fact of outsourcing of ITES activities to third party vendors and functional comparability - the company has outsourced the IT enabled services to third party vendors, the matter is remitted back to the AO/TPO for fresh consideration of the issue of comparability - The TPO has admitted that the company has two segments, and only the IT Enabled Services Segment, relating to engineering design services was considered by the TPO for comparability analysis - the functions performed by the Engineering Design services segment of the company cannot be considered as a comparable to the ITES/BPO functions – Decided partly in favour of Assessee. Exclusion of communication charges – Computation of deduction u/s 10A – Held that:- The AO has excluded the amount from the export turnover, on the ground that expenses are attributable to delivery of product outside India - this cannot be a ground to reject the contention of the assessee – relying upon CIT V/s. Gem Plus Jewellery [2010 (6) TMI 65 - BOMBAY HIGH COURT] - while upholding the exclusion of communication charges attributable to delivery of product outside India from the export turnover, it has to be excluded from the total turnover, while computing the deduction u/s 10A of the Act, for maintaining principle of parity - the orders passed by different benches of the Tribunal including the benches of the Tribunal at Hyderabad - the AO is directed to reduce the communication charges both from the export turnover as well as the total turnover, while computing deduction u/s 10A of the Act – Decided in favour of assessee. Issues Involved:1. Transfer Pricing Issues2. Exclusion of Communication Charges from Export Turnover for Deduction under Section 10ADetailed Analysis:1. Transfer Pricing Issues:Selection of Comparables:The primary contention revolves around the selection of certain companies as comparables by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The assessee objected to the inclusion of the following companies:(a) Infosys BPO Ltd., Wipro Ltd. (Segment), HCL Comnet Systems and Services Ltd.:The assessee argued that these companies have significantly higher turnovers, making them incomparable. The Tribunal agreed, noting the substantial turnover differences and functional dissimilarities, and directed their exclusion from the list of comparables.(b) Eclerx Services Ltd.:The assessee contended that Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) company with exceptionally high margins, making it functionally different. The Tribunal, citing previous decisions, directed its exclusion due to its high profit margins and KPO nature.(c) Genesys International Corporation Ltd.:The assessee argued that Genesys is engaged in diverse activities, including geo-engineering services, making it functionally different. The Tribunal remitted the issue back to the TPO for fresh consideration, emphasizing the need to verify the functional differences and the impact of provision for bad debts.(d) Accentia Technologies Ltd.:The assessee objected to Accentia Technologies Ltd. due to exceptional events like mergers and acquisitions during the relevant financial year, impacting its profitability. The Tribunal directed the Assessing Officer (AO) to verify the impact of these events and reconsider the company's comparability.(e) Cosmic Global Limited:The assessee argued that Cosmic Global Limited subcontracts its IT-enabled services, making it functionally different. The Tribunal remitted the issue back to the AO/TPO for fresh consideration, emphasizing the need to verify the extent of subcontracting.(f) Crossdomain Solutions:The assessee contended that Crossdomain Solutions is a KPO service provider with a brand presence, making it functionally different. The Tribunal, following previous decisions, directed its exclusion from the list of comparables.(g) Acropetal Technologies Ltd. (SEG):The assessee argued that Acropetal Technologies Ltd. is primarily engaged in software development and engineering design services, making it functionally different. The Tribunal directed its exclusion, citing the functional dissimilarities with the assessee's IT-enabled services.Re-determination of ALP:The Tribunal directed the AO/TPO to re-determine the Arm's Length Price (ALP) considering the directions given regarding the exclusion of the aforementioned companies from the list of comparables.2. Exclusion of Communication Charges from Export Turnover for Deduction under Section 10A:Grounds for Exclusion:The assessee challenged the exclusion of communication charges of Rs. 80,15,215 from the export turnover while computing the deduction under Section 10A of the Income Tax Act. The AO excluded these charges on the grounds that they were attributable to the delivery of products outside India.Tribunal's Decision:The Tribunal cited the Hon'ble Bombay High Court's decision in CIT V/s. Gem Plus Jewellery and the Income-tax Appellate Tribunal Chennai Special Bench in ITO V/s. Sak Soft Ltd., which upheld the exclusion of communication charges from both the export turnover and the total turnover to maintain parity. The Tribunal directed the AO to reduce the communication charges from both the export turnover and the total turnover while computing the deduction under Section 10A.Conclusion:The assessee's appeal was partly allowed, with specific directions for re-determining the ALP and revising the computation of the deduction under Section 10A. The Tribunal emphasized the need for functional comparability and consistency in the treatment of communication charges for maintaining parity in tax computations.